Jevon, contacted us, asking about Warrants, a debt instrument used to secure a deal on Shark Tank.
Warrants were used to secure funding from Barbara Corcoran extended to The Coop on Shark Tank Episode 409. Barbara makes a loan to The Coop for $150,000. The Coop repays the loan in two years and extends Barbara Corcoran with a financial document known as a Warrant used to secure funding equal to 15% of The Coop‘s current value.
Before I get to far into the Warrants conversation, I am not offering legal or professional advice. I am not a lawyer or accountant; I don't even have a college education. I am offering my opinion based on personal experience and knowledge. Consult a Certified Public Accountant and Attorney that specializes in debt instruments such as Warrants. Basically, I am thinking out loud, and SharkTankBlog readers just happen to overhear the conversation.
Now that, we have the legal disclaimer out of the way, I can speak freely again!
Most people recognize Warrants as Stock Options; however they differ in that employees receive Stock Options and Investors or Advisers receive Warrants in exchange for services or investment. They both are issued with a specific price the certificate holder must pay in order to receive the difference in value. Warrants, like Stock Options have no voting rights unless exercised, or purchased.
Warrants used to secure funding often are a great tool allowing Investors to get paid back quickly, minimizing their risk while allowing Entrepreneurs to maintain 100% control of their business, provided the terms of the agreement are fulfilled. Investors should note Warrants do have an expiration date and must be purchased before that date, or they are no longer valid.
Borrowers must abide by the terms of the contract or face default from the lender, who will convert the loan into equity. The lender than becomes a shareholder and gains voting rights. Notes may be written to hand control to the lender in a default.
I can't stress enough I am not offering legal or professional advice. This is my interpretation of how Warrants, Stock Options and Convertible Notes work, all of which I have used and offered. Rules very due to time, state and situation. Contact Qualified Professionals (I am not qualified to give advice) before implementing anything in this post.